MARK WILSON/Getty Images

Fear in his eyes? Fed Chairman Ben Bernanke looks worried. He should be.

Twenty years ago this week, the U.S. stock market tumbled in the worst single-day decline in history. Looking back at the economic circumstances surrounding Black Monday, one can’t help but wonder: Could such a dramatic stock-market crash happen again?

Indeed, there are many parallels between the macroeconomic and financial conditions of late 1987 and the market conditions of today. Both times there has been new leadership at the Fed. In 1987, Alan Greenspan was newly minted as chairman of the Federal Reserve. Inflation was rising, and Greenspan responded by raising the fed funds interest rate by 50 basis points. Nevertheless, investors were skeptical about his ability to be a strong leader in difficult times. For example, on a Sunday television news show early in his tenure, he expressed his concerns about inflation; the next day stock markets sharply wobbled. Greenspan learned his lesson, realized the risks to his reputation, and never again gave a television interview on the economy, instead gaining a reputation for becoming altogether Delphic in his public pronunciations.

Similarly, relatively new Chairman Ben Bernanke also inherited an economy with high and rising inflation, and has responded by raising interest rates three times for a total of 75 basis points since he became Fed chairman last year. And like Greenspan, he too has had missteps with the media. Last spring, after making comments in front of Congress that investors interpreted as dovish, he told CNBC anchor Maria Bartiromo that he had been misunderstood and was more hawkish than the market perceived him. The next day, equity markets sharply contracted and Bernanke’s reputation was shaken. You can be sure that, like Greenspan, Bernanke will likely never speak to any TV reporter again.

The similarities between 1987 and today go far deeper than media dust-ups. Take, for example, twin deficits—the existence of both large and unsustainable budget deficits and current account deficits that are leading to an accumulation of a large stock of public debt and foreign debt in the United States. In the years leading up to Black Monday, unsustainable tax cuts and excessive military spending during President Ronald Reagan’s first term led to a strong dollar and a large current account deficit. After 1985, driven by the unsustainable external imbalance, the dollar started to fall. Likewise, today we bear the consequences of unsustainable tax cuts and runaway military spending. And since 2002, the dollar has started to fall under the pressure of the external imbalance.

Most notably, there are troubling parallels between 1987 and the present in trade. In the months leading up to Black Monday, the United States blamed Germany’s and Japan’s “weak” currencies for the continued U.S. trade deficit. In particular, American politicians stoked fears that a rising export giant like Japan would hollow out the U.S. manufacturing sector. The tensions came to a boil on October 18, when Treasury Secretary James Baker strongly suggested the need for a further fall in the dollar and implied that the reluctance of Germany and Japan to let the mark and yen appreciate could be met with retaliatory trade actions. The following day, the infamous Black Monday of October 19, 1987, the stock market crashed: The Dow Jones industrial average went into a free fall, losing 22.6 percent of its total value. The S&P 500 collapsed by 20.4 percent. This was the largest loss that Wall Street had ever experienced in a single day.

The risks of such a systemic financial crisis are just as serious today. Today’s scaremongering about “unfair” trade practices focuses not on Germany and Japan, but on China. U.S. politicians blame China for the United States’ low savings and external deficit. And American manufacturers fear that China will hollow out the U.S. traded sector (textiles, apparel, labor-intensive consumer products, auto parts and, soon enough, even cars) with its unstoppable export boom. There are several bills in Congress to slap tariffs against China if it does not allow its currency to sharply appreciate. The slowing growth of the U.S. economy and the upcoming presidential election in 2008 are increasing the protectionist mood in Congress regarding trade in goods. Markets are skittish and investors more risk averse after this summer’s financial volatility. And the growth of derivative instruments is much more massive than 20 years ago: These instruments can be used to hedge risks (such as the default risk on mortgages or corporate debt) but, in conjunction with high leverage, they are often used for highly risky speculative bets on risky assets, and thus they contribute to greater systemic risk.

In these conditions, it usually doesn’t take much to rattle markets and trigger a meltdown. Hopefully, Treasury Secretary Hank Paulson will avoid bullying China and the countries that are financing the U.S. current account deficit. It is not only bad manners to bite the hand that feeds you, but it’s also dangerous financial behavior: The United States badly needs this cheap foreign financing. The United States still needs to borrow about $800 billion every year—on top of all the previous stock of past borrowing—to finance its still increasing external deficit.